The zloty moved in a sideways trend between 4.28 and 4.30

Industrial production and retail sales are expected to rebound in October compared to previous month's reading, rising 6.5% y/y and 8.1% y/y, respectively. Local macro releases should not impact bond market. Brexit talks and PMI release for Eurozone might have influence on EURUSD and hence put pressure on zloty, which has moved recently in sideways trend.

 

This week:

• November 20: Industrial production to rebound in October

We expect industrial production to increase by 6.5% y/y in October, supported by a favorable calendar effect (+1 working day). Moreover, the market expects construction output growth to accelerate and grow by 21.0% in October, after a meager performance in September (up by 16.4%). The cost pressure should remain limited and hold stable around 3%.

• November 22: Retail sales to maintain solid growth

Retail sales are expected to rebound in October and increase by 8.1% in our view (market consensus at 7.5% y/y). The favorable situation on the labor market supports the high level of household spending, as wage growth in October arrived at 7.6% y/y, above our and market expectations. After the retail sales data release, a full dataset for October will be present and hence we will be able to provide a first estimation of GDP growth in 4Q18 according to our now-cast model.

 

Last week's highlights

• Flash GDP growth in 3Q18 came well above our and market expectations at 5.1% y/y

• Trade deficit of EUR 449mn was recorded and current account deficit thus amounted to EUR 547mn in September

• Wage growth arrived at 7.6% y/y in October, above market consensus

• Employment remained stable at 3.2% y/y in October

 

Bond market drivers

• 10Y yields went up further due to scandal around financial authority

Over the week, 10Y yields went up by 10bp to above 3.3%, due to a recent scandal around the financial authority and Getin Noble Bank. A week ago, Financial Supervision Authority (KNF) Chairman Chrzanowski resigned from his position after being accused of offering help to Getin Noble Bank in exchange for a PLN 40mn bribe. NBP Governor Glapinski assured in his recent statement that the Polish banking system is stable. As a result of the yield increase in Poland and a marginal decrease observed in Germany, the spread vs. the 10Y German Bund widened to 293bp, the highest level since the beginning of July. This week's local macro releases should be neutral for the bond market; however, the tensions regarding Brexit and the recent scandal regarding the financial authority in Poland could put some upward pressure on yields.

• Weekly performance of 5Y bonds (% in EUR)

The LCY bond market recorded an overall negative performance of -0.45% last week. Markets in Poland, the Czech Republic and Romania were the worst-performing ones. In Poland, the correction of the EURPLN and yield increase constituted an overall performance of -0.83% (in EUR). In the Czech Republic, it was also the depreciation of the Czech koruna that influenced the LCY bond market, whereas in Romania the yield increase was the main reason behind the meager performance of LCY bonds last week.

 

FX market drivers

• Zloty moving in sideways trend, despite hard Brexit risks

The zloty moved in a sideways trend between 4.28 and 4.30 vs. the EUR throughout the week, but the Brexit uncertainties and corruption scandal added some pressure at the end of the week, when the EURPLN went above 4.31. This week, the PMI release for the Eurozone might impact the EURUSD; however, the Brexit talks will most likely remain the main risk factor for the EUR. If a hard Brexit becomes foreseeable, the dollar would probably strengthen and hence the zloty might depreciate more strongly against the EUR in the medium term.

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